How Changes In Changes In Inventories Have Brought US The "Recession" That Is Probably Not A Recession

 Based on just announced preliminary results, it looks like the US will have experiences negative GDP growth for the first two quarters of 2022. Based on a "rule of thumb" introduced in a New York Times column in 1974 by then BLS Commissioner, Julius Shishkin, this could be an indicator of a recession happening. This rule of thumb got widely publicized, even showing up in some textbooks as well as being formally adopted as a defining criterion in some nations, such as Australia, for having a recession.

However, it has long been the case that in the US when recessions occur is decided by a committee of the National Bureau of Economic Research (NBER), which looks at a broader set of data to see widespread, deep, and persistent declines in general economic activity. Beyond just GDP these include employment, industrial production, and income. The committee has also traditionally waited for some time to make sure they are looking at fully adjusted and verified data before making their determinations.

Now it has usually been the case that these many variables tend to be highly correlated.  So, in fact, since 1947, it has been the case that when Shishkin's rule of thumb criterion was met, these other variables were also declining sufficiently for the NBER to declare that a recession had occurred. There have been some cases where recessions have been declared even when there were not two successive quarters of decline. The obvious and recent example was second quarter of 2020, when GDP declined very sharply, along with all those other variables, in connection with the first round of the Covid-19 pandemic.

The exception in the other direction was in 1947, when indeed there were two successive quarters of negative GDP growth, but no recession was declared.  Most notably at that time, employment did not decline, which may be the variable people really associate with a recession or deeper depression. But how could this come about, a negative GDP change while employment holds up? This in fact looks like what we are seeing now, as employment has steadily grown as has income over these last two quarters, even as it looks that GDP declined.

In both 1947 and this year it looks that the culprit has been that item labeled in the National Incone and Product Accounts, "changes in inventories." Negative numbers played a crucial role back then and this year as well for these negative GDP outcomes, even as employment and income held up. But in fact this item is not precisely what its label says it is.  It is actually the change in the change in inventories, not just the change in inventories, which enters into the calculation of GDP changes.

So in both Q1 and Q2 of this year, inventories have been rising, a situation of disequilibrium with a surplus, more goods being produced than are being bought. But what happened is that this rate of rise decreased. The change of inventories was positive, but the change in the change of inventories was negative, and that played a crucial role in bringing about the negative GDP performance. But this change in the change of inventories is something not obviously tied to either employment or income directly, which gives us this peculiar outcome where we might not have a recession, even though Shishkin's "rule of thumb" is satisfied.

While this may seem strange, it is in fact equivalent to private capital formation. The difference between the two is that while changes in inventories are often themselves negative, if not now, we basically never see negative private capital formation, with the exception maybe of massive destruction of capital stock during a war. But if we compare capital stock to the level of inventories. it can be seen how this operates. Private capital formation leads to a change in the capital stock and a change in inventories leads to a change in inventories.  Both add to GDP. But to see whether GDP is rising or falling one, must see if these items are rising or falling, the change in private capital formation, which is the change in the change of the capital stock, as well as the change in the change of inventories.  It is the second derivatives of the capital stock and of inventories that tell one whether or not GDP is growing positively.

Barkley Rosser

The Grain Deal

 Finally we have something sort of hopeful happen in the war in Ukraine that might help alleviate problems it has generated for much of the world.  A deal has been struck to allow Ukrainian grain to be exported from Odesa and two smaller ports near it across the Black Sea and out into the Mediterranean to world markets.  With something like 20 million tons of grain, mostly wheat, sitting there for some time, with Ukraine responsible for something like 10% of world wheat exports, this has been a major problem, pushing up the price of wheat and fertilizer and sunflower oil, with this hitting especially hard several nations in the Middle East such as Egypt and in East Africa, such as Somalia. This holds the potential indeed to more generally ease global inflationary pressure in the food sector.

This is a very curious deal, with it in fact being two deals. One is between Ukraine, the UN, and Turkey while the other is between Russia, the UN, and Turkey. But they fit together. It seems the key people pulling it off are Turkish President Erdogan and UN Secretary General Guterres. They must be applauded for this. Crucial to it is how commercial ships will be allowed into and out of the ports involved and how they will skirt mines in the Black Sea that will apparently not be fully removed. Curiously a key part of the negotiation involved getting insurance companies to agree that it could be pulled off so they would be willing to insure the ships involved. 

While this is a hopeful development, there are some mysteries about it and some reasons to be concerned it will not really get fulfilled. Obviously Ukraine will gain from it.  Erdogan gains much prestige and Turkey will play a central role as all ships involved must pass through Turkish-controlled Sea of Bosporus, where apparently they will be inspected by both Ukrainians and Russians as well as Turks to make sure no arms are smuggled in. I gather Turkey will also get some financial compensation.

The mystery to me is what does Putin or Russia more broadly get from this and why was he willing to go along with it? A probable key event was Putin's recent visit to Tehran, his first outside of the former Soviet Union since the invasion of Ukraine started on Feb. 24. President Erdogan also visited Tehran at the same time, and he and Putin met there at that time. I am sure that this discussion must have played a crucial role in sealing the deal, which makes me think there are parts of this that have not been made public. After all, Ukraine gains a lot, but Russia is already able to sell its grain, and the price for it may fall with the Ukrainian grain getting out into world markets.  I really am unclear why Putin agreed.

And indeed, the lack of obvious clear gains, aside from perhaps publicity to look not so bad in a situation where he and Russia have been sharply criticized, may lead to a lack of enthusiasm about following through on it fully and some sandbagging of it in practice. One sign of this is that Russia has hit Odesa with cruise missiles since the agreement was signed, reportedly a grain storage facility in particular. That certainly is not in the spirit of things. It has also been suggested that Russian inspectors in Istanbul may act to slow and delay the ships coming through with Ukrainian grain, if they do not actually outright break the agreement by sabotaging the ships while still in the Black Sea.

So, this is a deal that provides some hope. But it also looks to face some serious possibilities of not really being properly fulfilled.

Barkley Rosser

Patrick J. Micharls RIP

 I have just read an obituary in today's Washington Post of Pat Michaels, who died a week ago of unreported causes at age 72. He was long identified as one of the most influential "climate skeptics" in terms of policy, playing an important role in blocking the US from joining the Kyoto Accords in the 1990s and long a prominent figure in media debates on outlets such as the old "Crossfire" show, where his quick wit and ability to come up with sharp lines and stabs was notorious. He once called Al Gore a "wannabe scientist" and a 2000 book was titled, _The Satanic Gases_. Many other climatologists did not like to debate him in public because of all this.

From 1980 to 2006 he served as the State Climatologist of Virginia, also serving in the Environmental Sciences Department at the University of Virginia in Charlottesville. He resigned after being criticized by then-Governor Tim Kaine, complaining his academic freedom had been limited. He then was at the Cato Institute in Washington from 2006-2019, and at the Competitive Enterprise Institute after that. He received lots of funding from fossil fuel companies for his research for which he also received lots of criticism, although it looks that they paid him because they liked what he said, not that he said what they wanted him to say so they would pay him. Even former fellow UVa climatologist and great critic and rival of his, Michael Mann, agreed with that assessment of him in the obituary.  Mann also agreed that the "strident" and "battling" public image of Pat contrasted sharply with his personally "amicable" nature.

So, why am I memorializing him as well as calling him "Pat"? I first met him in 1975 at the University of Wisconsin-Madison when we were both graduate students and working on a model of world food production as impacted by climate change. The leader of that project, and his major professor, was the late Reid Bryson, the person from whom I first learned about chaos theory, in particular the famous butterfly effect model of Edward Lorenz. Bryson was an early strudent of how it appears that global climate could change quite quickly, once it got going, based on ice studies of the transitions in and out of ice ages, which appear to have happened quite quickly in terms of geological time. This fact underlies the concerns of the late Martin Weitzman about how climate may have power law distributions underlying it, due to all kinds of nonlinear positive feedback effects in the system.

As it was, Bryson was also a skeptic about global warming, one who emphasized the role of volcanic eruptions historically.  He used to argue that those advocating global warming were tools of the nuclear power industry, out to shut down the coal industry.  It must be noted, and has been forgotten or even denied, that in the early 1970s the debate in the academic literature over whether global warming or cooling would predominate was wide open, with equal numbers of papers arguing each side in academic journal articles in 1971. Were increasing aerosols and SO2 going to beat out increasing CO2? As it was, from about 1940 to about 1975, average world temperature was declining, if not too dramatically. Then it started going up, and soon thereafter the global warmers won the debate academically.  Particulates and SO2 fall out of the atmosphere quickly, while CO2 stays there a long time, not to mention that environmental laws in high income nations in the early 1970s began to reduce emissions of SO2 and aerosols, but not of CO2.

Pat Michaels, whose PhD was in ecological climatology in fact held nuanced and sophisticated views on all this, even if his libertarian and combative tendencies made him appear to be single-mindedly strident figure.  He accepted that new consensus and that global average temperature is rising, and that indeed a major part of that is due to human activities such as emitting lots of CO2 and methane. However, he argued that it was not doing so as rapidly or intensively as others said it was. I think recent years have undercut his position (and it has been several years since I had any communication with him), but he called himself a "lukewarmer." He was part of the UN's IPCC forecasting team, being one of those advocating a lower end projection compared to others. But he saw it happening, and he was in fact the first person I know who actually bought a hybrid car.

Having gotten to known him at Wisconsin, I used to visit him and go to lunch on a regular basis while he was in Charlottesville. We actually attempted some joint research projects that ended up going nowhere, although I think we were actually coauthors on a Working Paper out of the Wisconsin project. He used to describe me jokingly to his colleagues when we would go to lunch as "my old communist friend from Wisconsin." But we were friends, and I attended his first wedding.  I also learned a great deal from him, including the fact that global warming is happening more intensively in the Arctic regions, well before we all became inundated by photos of polar bears stuck on small pieces of ice.

He definitely had a great ego, which fed his enjoyment in public debates where I think he overstated his own views and had an unfortunate influence on public policy.  But he was effective because he was usually at least partly right. He did know what he was talking about, even when he exaggerated. His view of the Paris Accord was that is "climatologically insignificant," which I fear is probably the case. I note also, as a sign of his large ego is that he was convinced, perhaps not without reason, that he was the main model for the feisty protagonist of Michael Crichton's climate skeptic novel from 2004, the highly dramatic State of Fear.

I always liked Pat, although our last couple of email communications were a bit less friendly. I regret some of his influence on policy, but I also always respected him for the consistency and scientific basis of at least his climatological arguments, if not his policy ones, where his libertarian ideology played too much of a role. I am sorry for his family that he has passed. RIP, Pat.

Barkley Rosser

Listening To Dmitri Shostakovich's Music

 While recovering from a bout of Covid-19 (getting there), I have found myself listening to a lot of music by Soviet/Russian composer, Dmitri Shostakovich, mostly some of his 15 symphonies, which covr quite a range of styles from his first in 1926 to his last in 1971. I first heard Shostakovich 60 years ago in a junior high school music class when we were shown a film of a performance by the Leningrad Orchestra of his 1942 Leningrad Symphony No, 7's first movement, dramatic and military composed in the midst of the siege of Leningrad in WW II, Shostakovich's hometown.  I loved it.  Not too long after my family got a record of his 5th symphony from 1937, probably his most famous and popular, which helped rehabilitate him from the first round of political criticism he had faced for his overly modern opera Lady Macbeth of Mtensk, which came under criticism in 1936 as the Great Purges started.

Which brings up the fact of the ongoing controversies about Shostakovich's relationship to the Soviet government and more deeply to Russian musical history and culture.  It may be that I have been listening to him partly because I fear that along with much else he is going into a decline in recognition and influence due to a general reaction against Russian culture due to widespread anger over Putin's invasion of Ukraine.  My bet is that at least in Ukraine there will not be any public performances of music by Shostakovich in the near future due to this, even as his controversial 1962 13th Symphony was about the massacre at Babi Yar in Ukraine, set to poetry by Yevtushenko.

His relationship with the government and the Soviet Communist Party went up and down and up and down and up.  His First Symphony, composed when he was 19, was an instant success and made him an early hero of Soviet composition, praised by Stalin. But this meant that his work got lots of attention, with criticisms coming hard and him in serious danger at the time of the purges.  But then his wartime compositions, led by the Leningrad symphony, restored him fully as a national leader in music.  

But then came an even more serious threat in 1948 when Culture Minister Zhdanov attacked "formalism" in music and art more generally, supposedly representing western "cosmopolite" tendencies, this coinciding with the emerging tensions of the Cold War. Shostakovich was criticized along with his neoclassical colleague, Sergei Prokoviev, and Armenian composer, Aram Khachaturian. He was removed from the Conservatory and narrowly escaped arrest. He would be rehabilitated partially the next year and sent to a cultural conference in New York where he was forced to criticize the music of Stravinsky, which he reportedly admired.  During this period he wrote film music "to pay the rent," some official safe works, and then other works "for the desk drawer."

The death of Stalin changed things, although he would not have a full rehabilitation until 1956. In 1954 he composed the boisterous Festival Overture that has come to identified with Russian nationalism and militarism, although its motivation appears to have been a celebration of the post-Stalin political and cultural thaw. In 1960 he finally joined the Communist Party and served as Head of the Soviet Composers Union from 1960-68. During this period he supported some dissident artists, most notably the poet,Joseph Brodsky, in 1865, helping to get him rehabilitated. While some of his later works drew occasional criticism, with him experimenting with 12-tone row in his 14th Symphony, he was never in serious danger again, and would come to have an island near Antarctica named for him on Soviet request before he died in 1975 of a heart attack after numerous long illnesses.

I happen to love his music. His life and career seem to parallel much of Soviet cultural history, both its ups and downs.  He is a highly complicated figure.  I note for those not acquainted with his music, he was strongly influenced by Gustav Mahler, as well as Russian folk music, and other influences.  I regret that his reputation may now be dragged down because of his implicit association with the current war.

Barkley Rosser

The inflation fallacy redux

 Peter Dorman had a post on this topic here a while back.  The inflation fallacy says that inflation doesn't affect real income, since aggregate nominal income increases at the same rate as prices. 

But today you can't shake a stick without hitting someone, economist or lay-person alike,  talking about the harm that the current inflation is doing to real income.

So: what is going on?  If the inflation fallacy is correct then a fall in real wages  would imply an increase in real non-labor income. Is that happening?

But the larger point of the fallacy is that changes in real income have real, not monetary, causes.  If, for example, an increase in labor supply reduces the equilibrium real wage, this may well manifest itself in an inflation rate in excess of wage growth, and the blame for lower real wages might be placed, fallaciously, on high inflation.

So why are real wages falling? One explanation, given by Jason Furman, is that the demand-induced expansion of employment is the cause--real wages behaving, as is typical, counter-cyclically.

But something about that doesn't sit right with me. Lately, I have been thinking back, way back, to Bob Rowthorn's "conflict theory of inflation."  One implication is that the stagnation of real income, or a reduction in its growth rate --  and hasn't the pandemic been responsible for such a stagnation? -- can lead to inflation as everyone, capitalist and worker alike, tries to maintain their real incomes.  This is consistent with the inflation fallacy: we want to treat the consequence, higher inflation, as the cause, pandemic-induced lower real income.

I'm really asking for help here, and would love to hear what Peter, Barkley and Tom think.

(BTW, I have the same puzzlement when I read descriptions of the great inflation related to the influx of New World gold as a cause of lower real wages and capital accumulation.)

Just How Bad Is Biden's Trip To Saudi Arabia?

 Yes, I posted on this awhile ago, but at that time it was a maybe. Now he is in the air on his way, although, of course, to Israel and the West Bank first, where I have no complaint or comment much.

So, basically what I said earlier largely holds, that this is not a trip with much good likely to come out of it. Main "goods"?: affirmation of in-place cease-fire in awful war in Yemen, a diplomatic triumph of the Biden admin, but I doubt much improvement on that situation happening from this trip. Yes, it will probably "affirm" it, but that is not much. 

Do not expect much on the Israeli front, either there, in the West Bank, or in terms of Saudi-Israeli relations, main reason for that is current Israeli government is in process of collapsing. Elections about to happen and we may have the awful Netanyahu back. Oh, I guess this may be an argument for Biden visiting at least Israel now while he can talk to the less bad current government before it falls.

On oil prices, well, I doubt Saudis will do much, and to the extent they probably already have, and crude prices did just drop below $100 barrel today (technically now yesterday), anyway, just prior to Biden's departure, which may be all he will get on that front, although people are ridiculing him for going just for this reason.

Oh, he might get some political prisoners out. Actually, I think that might happen. This reminds me of he old US-Soviet days.  Soviets would always let some political prisoners out at a summit. I suspect this will happen, there being a well-known and long list of these, a couple of whom I know personally.  Needless to say, there is no way to bring back the late chopped-up Jamal Khoshoggi.

Of course, the worst thing about this trip is that for oil prices Biden did not need it (and will not get much). He could have and should have cut the deal with Iran as he said he would. Gossip says he was too taken in by "the Blob" in DC that just hates Iran. But this was a deal that should have been done, and now the Iranians will be supplying drones to the Russians. This continues to be by far the biggest error of the Biden admin, way above all.  He should have ignored these Blob assholes and do what he promised to do, which the vast majority of the world supported him to do.  Super big mistake, making this whole trip look just awful.

As  a final note I shall dump on Trump and Jared Kershner more specifically for the fact that Biden has to deal with the authoritarian murderer, MbS. The not widely reported fact is that they aided in his coming to power in what was effectrively a coup, and he paid them off big time, especially Kushner to the tune of $2 billion when Trump left office. This is why he could not get a security clearance, Kushner. Jared visited and provided intel to MbS privately on his enemies before he pulled his coup. 

The coup was to send his Ministry of Defense people to the palace of the then Crown Prince, Muhammed bin Nayef bin Abdulaziz al Sa'ud, much respected by US authorities who dealt with him, who imprisoned him and demanded that he step aside, which he eventually did. Trump and Kushner supported this. Bin Nayef was a reasonable guy, who remains under house arrest to this day. This is the real source of the fact that Biden has to deal with this horrible murderer, and, unfortunately, he must.

Barkley Rosser

What is Happiness?

 Post your entries in the comments. Sandwichman WILL JUDGE THEM.

White Rabbit

 I have finished reading to my two younger grandsons the two Alice books by Lewis Carroll. I read the edition with commentary by the late mathematician, Martin Gardner, who used to write for Scientific American. I also just listened to Jefferson Airplane's "White Rabbit," which is pretty bloody sharp, but which draws on both of the Alice books. While most attention is on the first one, "Wonderland," which got made into a not bad cartoon by Disney, the deep one is the second one, "Through the Looking Glass," with Dodgson (oh, excuse me, Carrol) a professor of logic at Oxford University, Oh, it really is deep shit.

There are so many cliches out of the book, but in fact the more serious ones come from the second one. The most cited of all lines from all the Alice books comes from the second one. It is when Alice encountereds the notorious Red Queen, whom she ultimately captures in the end, although that leads to the deep matte of life being a dream as the Red Queen turns into a silly kitten upon shaking and waking.

Anyway, that most famous line from all of them, which has economics signifigance, is the famous moment when the Red Queen drags her on to run very very fast, only to stay in the same place.

Barkley

Abraham Lincoln quoting Thomas Jefferson on judicial despotism and oligarchy

At Springfield, Illinois, July 17, 1858

Now, as to the Dred Scott decision; for upon that he [Douglas] makes his last point at me. He boldly takes ground in favor of that decision.

This is one-half the onslaught, and one-third of the entire plan of the campaign. I am opposed to that decision in a certain sense, but not in the sense which he puts on it. I say that in so far as it decided in favor of Dred Scott’s master and against Dred Scott and his family, I do not propose to disturb or resist the decision.

I never have proposed to do any such thing. I think, that in respect for judicial authority, my humble history would not suffer in a comparison with that of Judge Douglas. He would have the citizen conform his vote to that decision; the Member of Congress, his; the President, his use of the veto power. He would make it a rule of political action for the people and all the departments of the government. I would not. By resisting it as a political rule, I disturb no right of property, create no disorder, excite no mobs.

When he spoke at Chicago, on Friday evening of last week, he made this same point upon me. On Saturday evening I replied and reminded him of a Supreme Court decision which he opposed for at least several years. Last night, at Bloomington, he took some notice of that reply; but entirely forgot to remember that part of it.

He renews his onslaught upon me, forgetting to remember that I have turned the tables against himself on that very point. I renew the effort to draw his attention to it. I wish to stand erect before the country as well as Judge Douglas, on this question of judicial authority; and therefore I add something to the authority; and therefore I add something to the authority in favor of my position. I wish to show that I am sustained by authority, in addition to that heretofore presented. I do not expect to convince the Judge. It is part of the plan of his campaign, and he will cling to it with a desperate grip. Even, turn it upon him – turn the sharp point against him, and gaff him through – he will still cling to it till he can invent some new dodge to take the place of it.

In public speaking of it is tedious reading from documents; but I must beg to indulge the practice to a limited extent. I shall read from a letter written by Mr. Jefferson in 1820, and now to be found in the seventh volume of his correspondence, at page 177. It seems he had been presented by a gentleman of the name of Jarvis with a book, or essay, or periodical, called the ‘Republican,’ and he was writing in acknowledgement of the present, and noting some if its contents. After expressing the hope that the work will produce a favorable effect upon the minds of the young, he proceeds to say:

That it will have this tendency may be expected, and for that reason I feel an urgency to note what I deem an error in it, the more requiring notice as your opinion is strengthen by that of many others. You seem in pages 84 and 148, to consider the judges as the ultimate, arbiters of all constitutional questions – a very dangerous doctrine indeed and one which would place us under the despotism of an oligarchy. Our judges are as honest as other men, and not more so. They have, with others, the same passions for party, for power, and the privilege of their corps. Their maxim is, ‘boni judicis est ampliare jurisdictionem’; and their power is the more dangerous as they are in office for life, and not responsible, as the other functionaries are, to the elective control. The Constitution has erected no such single tribunal, knowing that to whatever hands confided, with the corruptions of time and party, its members would become despots. It has more wisely made all the departments co-equal and co-sovereign within themselves.

Thus we see the power claimed for the Supreme Court by Judge Douglas, Mr. Jefferson holds, would reduce us to the despotism of an oligarchy.

Now, I have said no more than this – in fact, never quite so much as this – at least I am sustained by Mr. Jefferson.

Vladimir Mau Has Been Arrested

 Vladimir who? I appreciate that most readers have never heard of this individual. But this is the sign of a major new shift in the situation in Russia. To make clear why this is important: until quite recently Vladimir Mau was the top economic advisor of V.V. Putin. Just prior to his arrest, he has just been reelected to the Board of Gazprom, the most important state-owned company in Russia. Apparently his arrest is part of a broader wave of arrests of prominent Russians who have apparently criticized the current policy of Putin. But I do not know what Mau said or did that led to this arrest. For all I had heard and knew he was a strong Putin supporter.

This is arguably the fuller confirmation of an older report that had been floating around for several years. This report was that in the past Putin paid attention to economic advisors such as Mau, for better or worse, with some of us, frankly, not particularly big fans of Mau. But he also paid attention to others as well, such as super capable Central Bank President, Elvira Naibullina, who reportedly attempted to resign from her position, but was blocked from doing so by Putin himself. But her husband has managed to get himself out of running the Higher Economic School of Economics ("Vwishka" for insiders). I have only the greatest worry and concern and sympathy for these people at this time, especially given this recent arrest of Mau.

What seems to have happened is that Putin stopped paying attention to his economic advisors, led by Mau, probably about the time of the arrival of the Covid-19 pandemic, which led him to retreating from most public interactions. So, reportedly, instead of economic advisors like Mau, he concentrated on an inner circle following the essentially fascistic "Eurasianist" views of people like llya Ilyugin and more importantly, Alexander Dugin, whose 1997 book on this stuff is now required reading by Russian senior military officers. 

Barkley Rosser

Barkley Rosser

Compensating Wage Differentials according to Dilbert

 

A Break On The JCPOA Iran Nuclear Deal?

 Maybe.

It is now reported that "talks are to resume," although most observers are not optimistic. But then today there is a report of a shakeup in the Iranian Revolutionary Guards hierarchy who seem to control the most serious of these things. Head of their intel, Taeb, has been removed, although it is unclear what this will lead to, despite noises he was too hardline and maybe a deal can be cut with these renewed talks.

Barkley Rosser